Here's something that you probably already know: cars experience depreciation over time. In fact, depreciation is the single most expensive cost of owning a car, outweighing the combined costs of fuel, maintenance, and insurance. While any car that you buy will lose value over time, there is a way that you can minimize the impact of depreciation.
A Depreciation Loophole for Savvy Shoppers
Depreciation is a weird phenomenon that is hard to quantify because not all cars experience it at the same rate. It varies by: manufacturer, make, and model; the age, history, and condition of the vehicle in question; supply and demand in a location; consumer psychology; and market forces beyond our control.
Because of all of the factors in play, it may seem like there is nothing a consumer can do to offset deprecation. Not so fast. According to Edmunds, savvy car buyers can beat the depreciation curve by utilizing a loophole they dub the "Used-Car Sweet Spot."
How do you take advantage of this loophole? It's simple - (1) You buy a used vehicle that is one or two years old, (2) you drive and own it for three or four years, and then (3) you sell or trade it in around the fifth or sixth year of its life.
Here's how these three steps help you "beat," or rather offset, depreciation:
- Buy a Used Vehicle that is One/Two Years Old
On average, new cars lose 10-11% of their value the moment they are driven off the lot. By the end of the first year, that same car will lose another 10% on average. In the years immediately after that, the deprecation a vehicle experiences becomes more gradual. So, to minimize the effects of depreciation, you should look to buy a car that has already experienced the steep first-year drop in value. Think of it in terms of dollars: According to Edmunds data, the average midsize sedan sells for $27,660 and it loses more than $7,400 in value in its first year. That same sedan will only lose approximately $6,000 in value in years two, three and four combined.
- Own and Drive it for Three/Four Years
These years are the namesake "sweet spot." There are many perks to owning a nearly-new vehicle. It has already suffered the fist-year depreciation hit, meaning that you can buy it at a discounted price. Yet, the relatively new vehicle should still have some of the latest and greatest safety and technology features. Also, one-year-old cars are usually still under the original limited bumper-to-bumper and powertrain warranty, which helps the owner avoid costly repairs (and also means that they don't necessarily have to purchase warranty coverage right away).
- Sell it before its Value "Drops like a Rock"
Around the sixth year of a vehicle's life, it will experience what Edmunds identifies as the second steepest drop in depreciation. Although it happens at different times for different vehicles, it usually occurs between years six and seven. Why does this happen? Around this time, vehicles are often in need of some major service work, such as the replacement of tires and other worn-out components. According to Edmunds, longtime used car dealers say that this is the period that value "drops like a rock." Selling before that happens will allow you to maximize your vehicle's resale value.
The depreciation rate of a vehicle may vary based on a variety of factors, but car buyers can still get ahead of the curve by following this plan.
Don't Despair if you Need a Car but have Bad Credit
Edmunds' loophole ties perfectly into the advice that we here at Auto Credit Express always give to potential buyers with damaged credit. We urge credit-challenged buyers to: (1) choose an affordable car, (2) make a down payment (the higher, the better), and (3) keep the term as short as possible. If you follow Edmunds plan and our advice, you stand to minimize the cost of your auto loan and the effects of depreciation all at once.
And if you are having trouble getting approved for financing, Auto Credit Express help. We can help you get connected to the dealership in your area that stands to give you your best shot at auto loan approval. All you need to do to get started is complete our 100% free and secure online application. The sooner you apply, the sooner you could be driving off the lot in your next car.